The results season is bringing some unwelcome news for private equity. Let’s start with Blackstone, the world’s largest alternative asset manager with more than US$1 trillion under management. Its second-quarter results on July 18 somewhat disappointed earnings per share expectations, with $2.67 billion in revenue, a 2.6% decline from the same period a year ago. But the devil, as they say, is in the detail.
In this case, it’s a detail picked up by Barron’s, which pointed out that Blackstone’s private equity returns trailed the S&P 500 considerably. According to the financial magazine’s analysis, Blackstone’s corporate private equity returns as of end-June were 11.3% versus 24.5% total return for the S&P 500 over the same period.
This isn’t even an exceptional blip. The magazine notes that the pattern was the same for the first half of 2023: 9.7% for Blackstone versus 19.4% for the S&P 500.
Another result released in mid-July was that of the California Public Employees' Retirement System (CalPERS). With its total asset value at $502.9 billion, CalPERS’ overall net returns for its financial year ended June 2024 was 9.3%. Private equity achieved 10.9%, albeit with figures lagged for one quarter, versus 17.5% for public equity.
In other words, the institutional investor limited partner community is also seeing its public equity results outperform its private equity commitments.
Of course, there are many reasons for investing in private equity besides outperformance, including diversification and the oft-reiterated argument that private equity will deliver strong performance over the long term. Against those merits, though, must be set the high cost of the asset class versus the public markets, which can offer exceptionally low fees and no illiquidity challenges.
I do believe that the public markets will eventually cease their exceptional bull run and returns will begin to look much more modest. However, I also believe that the secular environment for private equity has changed, and not just in the short term. The industry grew exceptionally fast during - and thanks to - the cheap money era. A far fatter asset class now faces far leaner times in terms of fundraising, deal flow, exits, multiples, and leverage. Some trimming can be expected.
According to Stephen Schwarzman, chief executive officer of Blackstone, the company’s $34 billion capital deployment in the second quarter was “the highest level of investment activity in two years”. It will be interesting to see the performance numbers of the private equity portion of that deployment.